MOBIVITY HOLDINGS CORP. - Quarter Report: 2011 March (Form 10-Q)

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Nevada		26-3439095
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)

Large accelerated filer	o		Accelerated filer	o
Non-accelerated filer	o		Smaller reporting company	x

As of May 13, 2011, the registrant had 21,279,286 shares of common stock issued and outstanding.

INDEX

			Page
Part I	Financial Information
Item 1.	Financial Statements		1
		Condensed Consolidated Balance Sheeets	1
		Condensed Consolidated Statements of Operations	2
		Condensed Consolidated Statements of Cash Flows	3
		Notes to Condensed Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		22
Item 4.	Controls and Procedures		22
Part II	Other Information
Item 1.	Legal Proceedings		23
Item 1A.	Risk Factors		23
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		30
Item 3.	Defaults Upon Senior Securities		31
Item 4.	Removed and Reserved		31
Item 5.	Other Information		31
Item 6.	Exhibits		31
Signatures			32

 

Item 1.

Financial Statements.

CommerceTel Corporation
Condensed Consolidated Balance Sheets
		March 31,				December 31,
		2011				2010
		(unaudited)				(audited)
Current Assets
Cash		$	205,191			$	373,439
Accounts Receivable			50,227				49,215
Other Current Assets			91,708				68,030
Total Current Assets			347,126				490,684
Equipment, Net			2,737				1,609
Intangible Assets, Net			77,105				-
Other Assets			46,317				46,317
TOTAL ASSETS		$	473,285			$	538,610
Current Liabilities
Accounts Payable		$	233,307			$	151,943
Accrued Interest			64,499				37,901
Accrued and Deferred Personnel Compensation			113,285				119,641
Deferred Revenue and Customer Deposits			286,677				233,318
Notes Payable, Net			889,283				803,156
Derivative Liabilities			289,504				334,478
Other Current Liabilities			68,692				69,142
Total Current Liabilities			1,945,247				1,749,579
Non-Current Liabilities
Common Stock Liability			128,030				-
Derivative Liabilities			81,794				-
Total Non-Current Liabilities			209,824				-
Total Liabilities			2,155,071				1,749,579
Stockholders' Deficit
Common Stock, $0.001 par value; 150,000,000 shares authorized; 17,854,286 and 17,700,000 shares issued and outstanding as of March 31, 2011 and December 31, 2010, respectively			17,854				17,700
Additional Paid-in Capital			7,202,830				6,945,584
Accumulated Deficit			(8,902,470	)			(8,174,253	)
Total Stockholders' Deficit			(1,681,786	)			(1,210,969	)
TOTAL LIABILITIES & STOCKHOLDERS' DEFICIT		$	473,285			$	538,610

See accompanying notes to condensed consolidated financial statements.

CommerceTel Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
		Three months ended March 31,
		2011				2010
Revenues
Revenues		$	140,638				223,724
Cost of revenues			79,837				124,054
Gross Margin			60,801				99,670
Operating Expenses
Sales & marketing expense			57,851				32,281
Engineering, research, & development expense			128,571				91,522
General & administrative			545,039				201,858
Total Operating Expenses			731,461				325,661
Loss From Operations			(670,660	)			(225,991	)
Other Income/(Expense)
Interest income			158				-
Interest expense			(105,408	)			(16,653	)
Change in fair market value of derivative liabilities			47,693				-
Gain on debt extinguishment			-				114,551
Total Other Income/(Expense)			(57,557	)			97,898
Net Loss		$	(728,217	)		$	(128,093	)
Net Loss Per Share - Basic and Diluted		$	(0.04	)		$	(0.02	)
Weighted average number of shares during the period - basic and diluted			17,711,048				7,267,972

See accompanying notes to condensed consolidated financial statements.

CommerceTel Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
		Three months ended March 31,
		2011				2010
OPERATING ACTIVITIES
Net loss		$	(728,217	)		$	(128,093	)
Adjustments to reconcile net loss to net cash used for operating activities
Gain on debt extinguishment			-				(114,551	)
Stock-based compensation			239,403				31,291
Depreciation and amortization expense			2,037				1,670
Change in fair market value of derivative liabilities			(47,693	)			-
Amortization of deferred financing costs			10,000				-
Amortization of note discounts			78,810				-
Increase (decrease) in cash resulting from changes in:
Accounts receivable			(1,012	)			(14,708	)
Other assets			(33,678	)			(6,196	)
Accounts payable			81,364				56,415
Accrued interest			26,598				16,653
Accrued and deferred personnel compensation			(6,356	)			36,351
Deferred revenue and customer deposits			53,359				(12,308	)
Other liabilities			(450	)			195
Net cash used for operating activities			(325,835	)			(133,281	)
INVESTING ACTIVITIES
Purchases of equipment			(2,412	)			-
Acquisition of intangible assets			(60,001	)			-
Acquisition of other assets			-				(1,605	)
Net cash used for investing activities			(62,413	)			(1,605	)
FINANCING ACTIVITIES
Proceeds from capital contributions by former parent			-				124,897
Proceeds from issuance of notes payable			10,000				-
Proceeds from issuance of common stock and warrants			210,000				-
Net cash provided by financing activities			220,000				124,897
Net change in cash			(168,248	)			(9,989	)
Cash at beginning of period			373,439				11,003
Cash at end of period		$	205,191			$	1,014
Supplemental disclosures:
Cash paid during period for :
Interest		$	-			$	-
Income Taxes		$	-			$	-
Non cash investing activities:
Common stock issued for intangible assets		$	17,857			$	-

 

 

The Company’s financial instruments consist of cash, accounts receivable, other assets, accounts payable, accrued expenses, notes payable, derivative liabilities, common stock liability and other current liabilities. Fair value estimates of these instruments are made at a specific point in time, based on relevant market information. These estimates may be subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. As of March 31, 2011 and December 31, 2010, the carrying amounts of the Company’s financial instruments are generally considered to be representative of their respective fair values because of the short-term nature of those instruments or because they have been adjusted to fair value on the reporting date.

Bifurcated embedded derivatives are initially recorded at fair value and are then revalued at each reporting date with changes in the fair value reported as non-operating income or expense. When the equity or convertible debt instruments contain embedded derivative instruments that are to be bifurcated and accounted for as liabilities, the total proceeds received are first allocated to the fair value of all the bifurcated derivative instruments.  The remaining proceeds, if any, are then allocated to the host instruments themselves, usually resulting in those instruments being recorded at a discount from their face value.

Net loss per share is presented as both basic and diluted net loss per share. Basic net loss per share excludes any dilutive effects of options, shares subject to repurchase and warrants. Diluted net loss per share includes the impact of potentially dilutive securities. During 2011 and 2010, the Company had securities outstanding which could potentially dilute basic earnings per share in the future, but were excluded from the computation of diluted net loss per share, as their effect would have been anti-dilutive. These outstanding securities consist of 2,383,750 outstanding options and 140,000 outstanding warrants. In addition, see potential issuances associated with warrants and convertible debt in Notes 3 and 4.

		March 31, 2011				December 31, 2010
Bridge notes payable		$	1,010,000			$	1,000,000
Less unamortized discounts:
Variable maturity discount			(1,120	)			(1,569	)
Warrant discount			(191,581	)			(267,259	)
Bridge notes payable, net of discounts		$	817,299			$	731,172

The Company calculated the fair value of the compound embedded derivatives associated with the convertible notes payable utilizing a complex, customized Monte Carlo simulation model suitable to value path dependant American options. The model uses the risk neutral methodology adapted to value corporate securities. This model utilized subjective and theoretical assumptions that can materially affect fair values from period to period.

		Notes Payable								Accrued Interest
		3/31/2011				12/31/2010				3/31/2011				12/31/2010
Bridge Notes, net, as discussed above		$	817,299			$	731,172			$	40,477			$	15,792
Unsecured (as amended) note payable due to our Company’s former Chief Executive Officer, interest accrues at the rate of 9% compounded annually, all amounts due and payable December 31, 2008 (See Note 10).			20,000				20,000				8,854				8,223
Note payable due to a trust, interest accrues at the rate of 10% per annum, all amounts due and payable December 31, 2006. The Company is currently negotiating the payment terms of this note.			51,984				51,984				15,168				13,886
		$	889,283			$	803,156			$	64,499			$	37,901

 

		Shares				Weighted-average exercise price				Weighted-Average Remaining Contractual Term (Years)
Outstanding January 1, 2011			1,808,750			$	0.32			4.98
Granted			575,000				1.45				7.63
Exercised			-				-				-
Forfeited			-				-				-
Outstanding March 31, 2011			2,383,750			$	0.59				5.27
Exercisable options at March 31, 2011			198,436			$	0.32				4.26

The Company measures and recognizes compensation expense for all stock-based payment awards made to employees, directors and non-employees based upon estimated fair values.  The Company recorded stock-based compensation in operating expenses for employees and non-employees of $18,274 and $221,129, respectively, for the three months ended March 31, 2011.

		March 31, 2011
		Employee Options				Non-Employee Options
Expected volatility			60	%			60	%
Risk-free interest rate		1.40% to 1.97%					2.24	%
Forfeiture rate			0	%			0	%
Expected dividend rate			0	%			0	%
Expected life (yrs)			3.00 to 5.00				4.75 to 5.00

The Company maintains deferred tax assets that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. These deferred tax assets include net operating loss carryforwards, deferred revenue and stock-based compensation.  In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.  The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible.  The Company considers projected future taxable income and planning strategies in making this assessment.  Based on the level of historical operating results and projections for the taxable income for the future, the Company has determined that it is more likely than not that the deferred tax assets will not be realized.  Accordingly, the Company has recorded a valuation allowance to reduce deferred tax assets to zero.  There can be no assurance that the Company will ever be able to realize the benefit of some or all of the federal and state loss carryforwards, either due to ongoing operating losses or due to ownership changes, which limit the usefulness of the loss carryforwards.

		Variable conversion liability				Warrant / shares liability				Down round liability				Total
Beginning balance January 1, 2011		$	1,208			$	333,270			$	-			$	334,478
Issuances			11				2,672				81,830				84,513
Change in fair market value of derivative liabilities			(311	)			(47,346	)			(36	)			(47,693	)
Ending balance March 31, 2011		$	908			$	288,596			$	81,794			$	371,298

During the three months ended March 31, 2011, two customers accounted for 37% and 17%, respectively, of our revenues.  During the three months ended March 31, 2010, one customer accounted for 44% of our revenues.  At March 31, 2011, the accounts receivable balances for these two customers were $13,118 and $10,621, respectively.  At March 31, 2010, the accounts receivable balances for the one customer was $13,519.  The loss of any of these customers could have a material adverse impact on the Company’s business.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Mobile devices are emerging as the principal interactive channel for brands to reach consumers since it is the only media platform that has access to the consumer virtually anytime and anywhere. Brands and advertising agencies are recognizing the unique benefits of the mobile channel and they are increasingly integrating mobile media within their overall advertising and marketing campaigns. Our objective is to become the industry leader in connecting brands and enterprises to consumers’ mobile phones.

 

Critical Accounting Policies and Estimates

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Item 4.

Controls and Procedures

 

 

 

	(1)	inadequate segregation of duties and effective risk assessment; and
	(2)	insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of both generally accepted accounting principles in the United States and guidelines of the Securities and Exchange Commission.

 

 

Part II Other Information

Item 1.

Legal Proceedings

Item 1A.

Risk Factors.

·	market acceptance of our mobile marketing and advertising services;

·	the need to adapt to changing technologies and technical requirements;

·	the need to adapt to changing regulations requiring changes to our processes or platform; and

·	the existence and cost of opportunities for expansion through internal growth and acquisitions.

 

·	Potentially dilutive issuances of our securities, the incurrence of debt and contingent liabilities and amortization expenses related to intangible assets, which could adversely affect our results of operations and financial condition;

·	The possibility that staff or customers of the acquired company might not accept new ownership and may transition to different technologies or attempt to renegotiate contract terms or relationships;

·	The possibility that the due diligence process in any such acquisition may not completely identify material issues associated with product and service quality, intellectual property issues, key personnel issues or legal and financial contingencies; and

·	Difficulty in integrating acquired operations due to technology constraints or geographical distance.

 

We outsource all of our data center facility management to third parties who host the actual servers and provide power and security in multiple data centers in each geographic location. These third party facilities require uninterrupted access to the Internet.  If the operation of our servers is interrupted for any reason, including natural disaster, financial insolvency of a third party provider, or malicious electronic intrusion into the data center, our business would be significantly damaged.  As has occurred with many Internet-based businesses, on occasion in the past, we have been subject to "denial-of-service" attacks in which unknown individuals bombarded our computer servers with requests for data, thereby degrading the servers' performance. While we have historically been successful in relatively quickly identifying and neutralizing these attacks, we cannot be certain that we will be able to do so in the future. If either a third party facility failed, or our ability to access the Internet was interfered with because of the failure of Internet equipment in general or we become subject to malicious attacks of computer intruders, our business and operating results will be materially adversely affected.

·	implement additional management information systems;

·	further develop our operating, administrative, legal, financial and accounting systems and controls;

·	hire additional personnel;

·	develop additional levels of management within our company;

·	locate additional office space in various countries; and

·	maintain close coordination among our engineering, operations, legal, finance, sales and marketing and customer service and support organizations.

There has been a limited trading market for our common stock on the Over-the-Counter Bulletin Board.  The lack of an active market may impair the ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value of your shares. An inactive market may also impair our ability to raise capital by selling shares of capital stock and may impair our ability to acquire other companies or technologies by using common stock as consideration.

·

dilution caused by our issuance of additional shares of common stock and other forms of equity securities, which we expect to make in connection with future acquisitions or capital financings to fund our operations and growth, to attract and retain valuable personnel and in connection with future strategic partnerships with other companies;

·	announcements of new acquisitions or other business initiatives by our competitors;

·   ·

our ability to take advantage of new acquisitions or other business initiatives; quarterly variations in our revenues and operating expenses;

·	changes in the valuation of similarly situated companies, both in our industry and in other industries;

·	changes in analysts’ estimates affecting us, our competitors and/or our industry;

·	changes in the accounting methods used in or otherwise affecting our industry;

·	additions and departures of key personnel;

·	announcements by relevant governments pertaining to additional quota restrictions; and

·	fluctuations in interest rates and the availability of capital in the capital markets.

We do not intend to declare dividends for the foreseeable future, as we anticipate that we will reinvest any future earnings in the development and growth of our business. Therefore, investors will not receive any funds unless they sell their common stock, and stockholders may be unable to sell their shares on favorable terms or at all. Investors cannot be assured of a positive return on investment or that they will not lose the entire amount of their investment in the common stock.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

The transactions described above were exempt from registration under the Securities Act pursuant to Section 4(2) thereof.  The transactions were not conducted in connection with a public offering, and no public solicitation or advertisement was made or relied upon by the investor in connection with this offering.

Item 3.

Defaults Upon Senior Securities.

Item 4.

Removed and Reserved.

Item 5.

Other Information.

Item 6.

Exhibits.

The exhibits listed in the Exhibit Index immediately preceding the exhibits are filed as part of this Quarterly Report on Form 10-Q and such Exhibit Index is incorporated herein by reference.

				CommerceTel Corporation
Date: May 19, 2011		By:		/s/Dennis Becker
				Dennis Becker
				Chief Executive Officer
				(Principal Executive Officer)
Date: May 19, 2011		By:		/s/Paul Meyer
				Paul Meyer
				Chief Financial Officer
				(Principal Financial)

 

Exhibit Number		Description
10.5		Asset Purchase Agreement dated March 3, 2011 by and among the Company, CommerceTel, Inc., Adsparq and selling shareholders (1)
10.6		Acquisition Agreement, effective as of April 1, 2011 by and among the Company, CommerceTel, Inc., Mobile Visions, Inc., Mobivity LLC and their controlling shareholders (1)
10.7		Form of Subscription Agreement (1)
31.1		Certification of Dennis Becker, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2		Certification of Paul Meyer, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1		Certification of Dennis Becker, Chief Executive Officer, and Paul Meyer, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

(1)

Incorporated by reference to the Company’s Annual Report on Form 10-K filed on April 14, 2011